Tuesday, January 03, 2017

What a difference a year makes!
At the start of 2016, investors were rather pessimistic and risk averse,
preferring bonds to stocks. By the end of the year, they were quite optimistic
and preferred stocks to bonds. In between, markets traveled a bumpy road.

During January of last year, few
investors imagined we would be where we are today. Markets started 2016 in a
tailspin with investors worried about slower growth in China, U.S. economic
strength, oil price declines, and the possibility of a global recession.

During the first 10 trading days
of 2016, U.S. stock markets got off to their worst start for any year on
record, reported Financial Times. The
Standard & Poor’s 500 (S&P 500) Index lost about $1.4 trillion in value
and every major sector in the index was in the red, except for utilities.

The sharp drop stunned
investors, and many shifted assets from global stocks into bonds. In late
January 2016, CNN Money reported:

“Investors yanked $2.9 billion from
U.S. stocks last week, marking the seventh week of outflows out of the past
eight, according to Bank of America Merrill Lynch. Emerging markets, which have
been in turmoil for months, experienced a 13th straight week of outflows of
$1.2 billion. Money is fleeing to safe haven government bonds.”**

Investor sentiment was near its
all-time low. On January 14, 2016, just 17.9 percent of participants in the American Association of Individual Investors
(AAII) Investor Sentiment Survey said they were bullish. The all-time low
is 12 percent and the long-term average for bullishness is 38.39 percent.
Clearly, investors were not feeling optimistic about stock markets.

A specialist cited by Time.com discussed market performance
and investor sentiment in the context of the AAII Survey:

“Historically…the S&P 500 has
advanced 7.7 percent in the six months after reaching this level of
bearishness. By contrast, stocks have historically gained only 2.7 percent in
the six months following the most bullish readings among individual investors.”

As it turned out, the S&P
500 Index may have pushed the historic average higher during 2016. Barron’s reported the Index finished the
year up 9.5 percent and returned 12 percent when dividends were included.

Investors didn’t enjoy a smooth
ride last year, though. Late in June, the United Kingdom shocked the world when
it voted to leave the European Union. Financial
Times reported global markets lost $3 trillion during two days of brutal
trading, including “…a nearly $1tn loss for the S&P 500, or the third worst
two-day drop ever in value terms.”

Markets recovered relatively
quickly after the Brexit drop. However, it looked like another rout was in the
works in November as the U.S. presidential election votes rolled in. The
initial reaction of global markets to Donald Trump’s election was panic;
however, optimism soon prevailed and U.S. markets rallied on hopes the
President-elect’s yet-to-be defined policies would bolster growth and
positively affect the global economy.

The expectation of stronger growth,
along with an anticipated December rate hike by the Federal Reserve, pushed
bond yields higher and investors moved assets out of bonds and into stocks. Barron’s reported:

At the end of 2016, investor
sentiment had risen well above the long-term average. More than 45.5 percent of
participants in the AAII Investor Sentiment Survey were feeling bullish.
Investors weren’t the only ones feeling optimistic. The Investors Intelligence survey of investment advisors found the
bulls (59.8) outnumbered the bears (19.6) quite significantly in late December.
The Bull/Bear Ratio was at 3.05, according to Yardeni Research.

The ratio is considered by many
to be a contrarian indicator. When the Bull/Bear Ratio is at 1.0 or lower, and
when it is at 3.0 or higher, we may be near a turning point for stock markets,
according to Investing Answers and The New York Times.

Data as of 12/30/16

1-Week

Y-T-D*

1-Year*

3-Year

5-Year

10-Year

Standard & Poor's 500
(Domestic Stocks)

-1.1%

9.5%

8.5%

6.7%

12.2%

4.7%

Dow Jones Global ex-U.S.

1.0

1.8

1.3

-3.5

2.9

-1.3

10-year Treasury Note (Yield
Only)

2.5

NA

2.3

3.0

1.9

4.7

Gold (per ounce)

2.5

9.1

9.4

-1.3

-5.9

6.1

Bloomberg Commodity Index

1.4

11.4

12.1

-11.7

-9.1

-5.9

DJ Equity All REIT Total
Return Index

1.6

8.9

7.9

12.6

12.0

5.0

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg
Commodity Index returns exclude reinvested dividends (gold does not pay a
dividend) and the three-, five-, and 10-year returns are annualized; the DJ
Equity All REIT Total Return Index does include reinvested dividends and the
three-, five-, and 10-year returns are annualized; and the 10-year Treasury
Note is simply the yield at the close of the day on each of the historical time
periods.

Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not
applicable.

*The year-to-date and one-year
returns are different. The year-to-date return reflects performance from
12/30/2015 to 12/30/2016. The one-year return reflects performance from
12/31/2015 to 12/30/2016.

** US Treasuries may be
considered “safe haven” investments but do carry some degree of risk including
interest rate, credit and market risk.
They are guaranteed by the US government as to the timely payment of
principal and interest and, if held to maturity, offer a fixed rate of return
and fixed principal value.

how important is a
college degree? At the University of Baltimore 2016 Midyear
Commencement, Federal Reserve Chair Janet Yellen shared her thoughts about the
importance of college:

“Economists are not certain about
many things. But we are quite certain that a college diploma or an advanced
degree is a key to economic success. Those with a college degree are more
likely to find a job, keep a job, have higher job satisfaction, and earn a
higher salary. The advantage in earnings is large. College grads' annual
earnings last year were, on average, 70 percent higher than those with only a
high school diploma. Back in 1980, the difference was only 20 percent. The gap
in earnings is significant only a few years after graduation – almost $18,000 a
year, according to some recent data. Beyond these advantages, research also
shows that a college or graduate degree typically leads to a happier,
healthier, and longer life.”

There appears to be significant
benefits to attending college. However, Aon
Hewitt recently suggested there also may be some drawbacks, especially for
students who borrow to pay for their degrees. Aon’s survey of 2,000 U.S. workers found 44 percent of Millennials,
26 percent of Gen X, and 13 percent of Baby Boomers are repaying student loans
which, “…can have a long-term impact on workers' financial future.”

The survey found just 71 percent
of workers with student loans were participating in employer-provided
retirement plans as compared to 77 percent of workers without student loans.

Weekly Focus – Think About It

“In other words, I claim, if we
really want to improve our judgment as individuals and as societies, what we
need most is not more instruction in logic or rhetoric or probability or
economics, even though those things are quite valuable…We need to learn how to
feel intrigued instead of defensive when we encounter some information that
contradicts our beliefs.”

expenses, or sales charges.
Index performance is not indicative of the performance of any investment.

* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S.

Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.

* Gold represents the
afternoon gold price as reported by the London Bullion Market Association.

The gold price is set twice
daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in
U.S. dollars per fine troy ounce.

* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.

* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.

* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.

* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.

* Consult your financial
professional before making any investment decision.

* Stock investing involves
risk including loss of principal.

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